* Polish central banker sees contagion risk in Latvia crisis
* Sweden urges swift accord between Latvia and lenders
* IMF's Belka, economists play down fears of spillover
* Trichet, Almunia say no relaxation of rules for euro entry
(Updates currency levels, edits)
By Jan Strupczewski and Karolina Slowikowska
WARSAW, June 5 (Reuters) - Polish and Swedish officials
appealed for swift action to help beleaguered Latvia on Friday
to prevent its economic crisis from spilling over into other
countries in Europe.
The tiny Baltic state, facing a brutal economic contraction
of up to 20 percent this year, is struggling to avoid a currency
devaluation that would hammer heavily exposed Swedish banks and
reignite worries over East Europe's prospects.
However, a senior IMF official, some economists and
ministers from two other countries which like Latvia peg their
currencies to the euro all played down the fears of regional
contagion, arguing that Riga's predicament was uniquely grim.
Latvia's prime minister, Valdis Dombrovskis, reaffirmed that
his government was not planning to devalue the lat. The issue of
Latvia's currency peg was not raised in talks on Friday with the
IMF and the EU, he said.
"There is a threat that the situation in Latvia may spill
over into the region," Dariusz Filar, a member of the Polish
central bank's Monetary Policy Council, told reporters on the
sidelines of an economic conference in Warsaw.
"This situation is a challenge that requires a reaction on a
broader scale than just Latvian, there is a need for more
international assistance," he said, without giving details.
Filar's comments knocked regional currencies. Poland's
zloty hit a five-week low versus the euro and Hungary's forint
fell sharply, weighed down also by poor industrial output data.
The International Monetary Fund and European Commission say
Latvia must make further deep spending cuts before receiving
fresh loans. Negotiations with the lenders are now underway.
PAIN
Economists say failure to clinch a deal could make
devaluation unavoidable, greatly increasing the pain for the many
Latvian companies and households holding large debts denominated
in foreign currencies.
"We need to reach a result in the negotiations and it must
happen soon," Swedish Finance Minister Anders Borg said on
Friday in Stockholm. "The government's view is that they need to
take more measures (in Latvia)."
Speaking at the Warsaw conference, called to mark the 20th
anniversary of the fall of communism in Poland, EU Monetary
Affairs Commissioner Joaquin Almunia said he expected Latvia's
parliament to approve further spending cuts.
"I recognise the difficult situation of Latvia but at the
same time I am confident that adequate measures will be
adopted," he said.
Devaluing the lat would increase pressure on neighbouring
Estonia and Lithuania but is unlikely to affect the broader
region of central and eastern Europe, J.P. Morgan analyst Nana
Francois said in a note to clients.
"We note that the GDP of the three Baltic countries equates
to less than 1 percent of eurozone GDP and around 5 percent of
emerging Europe GDP, so the regional impact would be low."
Marek Belka, head of the IMF's Europe department, also said
he did not expect much regional impact from Latvia's crisis.
Talk of devaluation has been swirling for months in the
ex-Soviet republic of two million, which saw its worst riots in
January since it regained its independence from Moscow in 1991.
"People are talking about this all the time and some friends
of mine have bought foreign money, but I don't see a reason why
to do it," Raivis Karlsons, 31, a plumber, told Reuters in Riga.
Estonia's foreign minister and Bulgaria's finance minister
both insisted, in separate statements, that their countries were
in better fiscal shape than Latvia and that they did not see in
the crisis a direct threat to their own currency boards.
Latvia's travails have revived a debate about the value of
currency board regimes.
Juergen Stark, a member of the European Central Bank's
executive board, said countries with flexible exchange rates
such as Poland were better placed to avoid big macroeconomic
imbalances and to absorb the effects of an economic slowdown.
NO SOFTENING OF RULES
Almunia, Stark and European Central Bank head Jean-Claude
Trichet, who was also in Warsaw, all made clear there would be
no easing of rules for euro zone membership due to the crisis.
"For the governing council of the ECB, what counts are the
criteria," said Trichet, referring to tough rules on inflation
and budget deficits which most east European states keen to
adopt the euro will now have great difficulty meeting.
Trichet said Poland had built up fewer macroeconomic
imbalances, allowing it to weather the global crisis better than
many of its peers in ex-communist Europe.
And addressing all euro aspirants, Trichet said: "Only after
the elimination of major macroeconomic imbalances and when
sufficient convergence has been achieved can countries expect to
reap the full benefits of euro area membership."
Poland, the largest ex-communist EU member, wants to join
the euro in 2012 but economists say this date is unrealistic.
(Additional reporting by Kuba Jaworowski, Dagmara Leszkowicz,
Piotr Bujnicki and Gabriela Baczynska in Warsaw, Stockholm and
Riga bureaux)
(Writing by Gareth Jones; editing by Andy Bruce)
